Formula For The Bargain
by digby
Do people really think this makes sense?
BLITZER: I’m going to bring Congressman Weiner in a second, but very quickly, because I asked Gene Sperling, the president’s economic adviser in the last hour, under his plan, the president’ plan, would General Electric which made $14 billion in profit last year worldwide, $5 billion here in the United States, they paid no taxes to the federal government. Under the Republicans’ plan, Congressman Hensarling, would G.E. pay any tax?
HENSARLING: Oh, absolutely. We get rid of all of the loopholes. And what we do is we bring rates down so that they can be competitive with our European competitors.
(CROSSTALK)
BLITZER: Some of the purists say that’s a tax increase then if you do that, if you get rid of those loopholes.
HENSARLING: No. We say we use that in order to bring rates down. We flatten. We make the tax code flatter, fairer, simpler, more competitive so that we can create jobs. What the president does is simply raise the effective tax rates, and I don’t know anybody in America who thinks that if you increase taxes on their employer, that they’re going to be able to hire your out-of-work neighbor much less give you a raise.
Let’s say they do this. They get rid of all the loopholes and exemptions, which greatly increases the revenue that corporations and wealthy individuals pay, but they lower the tax rates at the same time. It is certainly possible that such a formula could raise more revenue. But if you accept their argument that these companies are already paying too much in taxes then I don’t think it matters if they are paying more even though their rates are less. The bottom line is the bottom line.
This is a nonsensical argument. The best case for this plan would be that it remained revenue neutral, in which case it does nothing for the deficit. But what they are really saying is that they are going to kill the loopholes but slash their taxes even more so they will be paying less money over all, thereby raising the deficit. It makes no sense otherwise. These are Republicans after all.
Meanwhile, the President’s chief economic advisor Gene Sperling said this week that they agreed that raising revenue by “eliminating tax expenditures” will allow them to lower the rates, so this is highly likely to be a baseline agreement. Perhaps they think the Republicans and businesses don’t know that taxes are being raised, but I’m guessing they all understand exactly what’s going on: fake tax hikes in exchange for real spending cuts.
I suspect we will have a bunch of phony baloney bipartisan backpatting over “closing loopholes” which will be replaced forthwith as soon as the lobbyists and lawyers start passing around their wads of cash. But the “rates” will stay low going forward because, once again, if they “raise” them, our businesses will not be “competitive.”
There are some plans on the table which hit the middle class, such as eliminating the home mortgage deduction. As a matter of policy, there are some good reasons for talking about that. But in the middle of a real estate crash? I don’t think that’s going to happen. No, we are going to see a bunch of smoke and mirrors about closing loopholes and lowering rates to raise revenue. And in exchange for this great sacrifice on the part of the Republicans and big business, liberals will put average people’s skin in the game too and agree to cuts in government programs and the safety net. What a deal.
And yes, Obama will also promise to veto any extension of the Bush tax cuts for the wealthy when they expire — after the election. Unless, of course, the Republicans are able to hold the country hostage again with those middle class tax cuts and then … oh well. (It would be a really compelling argument for electing a Democratic House except that the last time we had both houses of congress it didn’t make a difference…)
There’s also another aspect to this argument that I think has to be grappled with. The Republicans are also openly saying that cutting rates raises the revenue. You remember the Laffer curve, right?
Long before he chaired President Obama’s Council of Economic Advisors, back in his professorial salad days at the University of Chicago, Austan Goolsbee wrote a seminal academic critique of what economists call the “Laffer Curve” – the theory that cutting marginal tax rates for the wealthy boosts economic growth and, in turn, government revenue. He surveyed six decades of tax-cut data, and his conclusions were unkind.
“The notion that governments could raise more money by cutting rates is, indeed, a glorious idea,” Goolsbee wrote in his final paragraph, adding: “Unfortunately for all of us, the data from the historical record suggest that it is unlikely to be true at anything like today’s marginal tax rates. It seems that, for now at least, we will have to keep paying for our tax cuts the old fashioned way.”
A dozen years after Goolsbee published that paper, the Laffer Curve retains canonical status among conservative economists. The broad idea that increased economic growth flows from cutting taxes and reducing government spending remains the cornerstone of Republicans’ economic plans.
Those are the policy beliefs that on Wednesday, in a speech outlining his plans for deficit reduction, Goolsbee’s boss derided as “just an article of faith”; this is the political and economic battleground that the president and his Republican foes are returning to for the 2012 election and the legislative skirmishes that will precede it.
Effective immediately, Obama and the GOP are resuming a long-running ideological fight over whether higher taxes always hamper growth, when and how government should safeguard its citizenry, and how much a society can ask of its wealthiest before the requests backfire on the economy at large.
And unlike in previous fights, which often ended in a borrowing-fueled “cut taxes, spend anyway” truce, the nation’s medium- and long-term fiscal realities demand that this one produce a clear winner.
Republicans are making the argument that lowering tax rates will bring in more revenue, just as they have been doing for the past 30 years. They are being a little bit cagey about it. It makes their free lunch conservatism go down so much better. And it’s true that the administration and the Democrats argue that this won’t work. Yet they are all basically signing on to the same formula. That’s interesting, don’t you think?
It looks as though the Democrats are going to sell this by saying they can raise a ton of money through “tax reform” (so much we’ll have enough left over to lower rates too!) and the Republicans will sell it by saying they’ll raise a ton of money by lowering rates (and we’ll close those loopholes too!) And after months of tiresome haggling over the details while the lobbyists spend huge sums buying them off, they will agree to a plan that raises phantom revenue while slashing real spending.
The above article concludes:
Amid the din, though, keep one nugget from Wednesday’s speech in mind: Obama’s statement that “our debt has grown so large that we could do real damage to the economy if we don’t begin a process now to get our fiscal house in order.”
That’s a statement hotly contested by some liberal economists. It’s also the foundation for any “grand bargain” with Republicans on long-term budgets. Even if no one notices yet.
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